Business context and reporting period
Virtus Investment Partners, Inc. is an asset manager serving retail and institutional clients through affiliated investment managers and select unaffiliated subadvisers. Revenue is principally based on assets under management (AUM). This Form 10-K covers the fiscal year ended December 31, 2021; it reports annual results, not standalone fourth-quarter results.
Year-end AUM was $187.2 billion, across open-end and closed-end funds, ETFs, retail separate accounts, institutional accounts and structured products. The company completed its AllianzGI strategic partnership in February 2021 and acquired Westchester Capital Management in October 2021. Stone Harbor, with $14.7 billion of AUM at year-end, was acquired January 1, 2022.
Financial performance and condition
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Total revenue | $979.2 million | $603.9 million | +62.2% |
| Operating income | $325.5 million | $143.2 million | +127.4% |
| Operating margin | 33.2% | 23.7% | +9.5 percentage points |
| Net income attributable to Virtus | $208.1 million | $80.0 million | +160.3% |
| Diluted EPS | $26.01 | $10.02 | +159.6% |
| Cash provided by operating activities | $665.7 million | Cash used: $226.1 million | Improved $891.8 million |
| Company cash and cash equivalents | $378.9 million | $246.5 million | +53.7% |
| Debt, balance-sheet carrying value | $266.3 million | $201.2 million | +32.4% |
Company cash excludes cash held by consolidated investment products (CIP), which is not available for general corporate use. Operating cash flow was substantially affected by activity in CIP, particularly higher net sales of CIP investments; it should not be read as solely corporate operating cash generation.
AUM increased 41.6% to $187.2 billion, reflecting $19.4 billion of market appreciation, $29.5 billion from the AllianzGI relationship, $5.1 billion from Westchester and $3.1 billion of net flows. Total sales were $36.5 billion versus $33.4 billion; net flows declined to $3.1 billion from $5.4 billion. Open-end funds had $2.9 billion of net outflows, offset by positive flows in other product categories. Average AUM rose 57.8% to $172.8 billion, while the overall average fee rate edged down to 42.9 basis points from 43.5 basis points.
Operating expenses rose 41.9% to $653.7 million, including higher compensation, distribution expenses and amortization, as well as a $12.4 million increase in the fair value of contingent consideration. The effective tax rate was approximately 25.7% (26% in the financial statement note). The filing does not provide a standalone fourth-quarter revenue or earnings figure in the supplied text.
At year-end, the company had $274.3 million of term-loan principal outstanding and no revolver borrowings; the balance sheet reports debt net of $8.0 million of issuance costs. The revolving facility provides $175.0 million of additional capacity. The company reported $665.7 million of operating cash flow, $175.0 million of investing cash outflow and $244.4 million of financing cash outflow. It paid $57.5 million to repurchase 193,193 shares and declared $37.2 million of common dividends during 2021.
Material changes, outlook and risks
- Growth drivers: Revenue and operating income increased mainly because of higher average AUM, including the AllianzGI relationship, market performance and net inflows. The S&P 500 rose 26.9% during 2021; the filing also reports gains in other major market indices.
- Acquisitions and contingent payments: The AllianzGI arrangement includes variable revenue-participation payments over seven years; its estimated liability rose to $150.1 million at year-end. Westchester consideration included $32.5 million of potential earn-outs; $20.0 million was paid in December, leaving $12.5 million recorded. Total balance-sheet contingent consideration was $162.6 million.
- Debt and capital allocation: A September 2021 refinancing established a $275 million, seven-year term loan and $175 million, five-year revolver. The agreement requires scheduled amortization and may require excess-cash-flow prepayments; covenants restrict certain actions, including distributions. Borrowings are floating-rate, and management estimated that a 100-basis-point rate change would alter annual interest expense by about $2.7 million.
- Outlook: The filing provides no specific earnings or revenue guidance. Management cautions that results depend on markets, AUM flows, performance, fees and future business conditions. The company declared a $1.50-per-share quarterly dividend in February 2022, payable in May; future dividends are not assured.
- Principal risks: Market declines, weak investment performance or client withdrawals can reduce fee revenue; competition may pressure fees and distribution access. Other cited risks include retaining key investment staff, reliance on intermediaries and unaffiliated subadvisers, cybersecurity and service-provider disruptions, regulatory or litigation exposure, acquisition integration and valuation, inflation, and goodwill or intangible-asset impairment. COVID-19-related economic, staffing and cyber risks remained uncertain.
- Contingencies and controls: Management stated that known legal and regulatory matters were not expected to have a material adverse effect, while noting outcomes are uncertain. Deloitte issued an unqualified audit opinion and concluded internal control over financial reporting was effective. The audit highlighted acquired-asset valuation, contingent-consideration valuation and consolidation assessments as critical audit matters.
Important facts for investors to verify
- How much of AUM growth and future fee revenue is attributable to market appreciation and acquired assets versus sustainable organic net flows, particularly given open-end fund outflows?
- What are the actual and prospective cash costs, payment terms and performance assumptions for AllianzGI, NFJ and Westchester contingent consideration?
- How do acquisition-related expenses, amortization and compensation affect ongoing margins and earnings conversion?
- What portion of reported operating cash flow reflects CIP activity, and what is the company’s underlying corporate cash generation after acquisition spending, debt service and shareholder returns?
- How sensitive are AUM, fee rates, investment income and floating-rate debt costs to market declines, redemptions, fee pressure and interest-rate changes?
- Confirm the distinction between $274.3 million of term-loan principal and $266.3 million of debt reported net of issuance costs, as well as covenant and mandatory-prepayment headroom.